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The International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the
adoption of IFRS Standards. For more information visit www.ifrs.org.
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Agenda ref 2D
STAFF PAPER February 2020
IASB® meeting
Project Amendments to IFRS 17
Paper topic Minor amendments
CONTACT(S) Roberta Ravelli [email protected] +44 (0)20 7246 6935
Anne McGeachin [email protected] +44 (0) 20 7246 6486
This paper has been prepared for discussion at a public meeting of the International Accounting Standards Board (Board) and does not represent the views of the Board or any individual member of the Board. Comments on the application of IFRS® Standards do not purport to set out acceptable or unacceptable application of IFRS Standards. Technical decisions are made in public and reported in IASB® Update.
Purpose of the paper
1. This paper provides staff analysis and recommendations about the feedback from
respondents to the Exposure Draft Amendments to IFRS 17 relating to proposed minor
amendments. This paper follows the tentative decision of the International Accounting
Standards Board (Board), at its November 2019 meeting, to consider further the
feedback from outreach and comment letters on these minor amendments.
2. The Exposure Draft:
(a) proposed minor amendments to the requirements in IFRS 17 Insurance
Contracts—as well as some minor consequential amendments to other
IFRS Standards—to address a number of cases in which the drafting did not
achieve the Board’s intended outcome; and
(b) included a number of editorial corrections to IFRS 17 that the Board had
identified after IFRS 17 was issued.
3. Overall, respondents expressed support for the proposed minor amendments.
However, some respondents expressed concerns or asked for clarifications about some
of the proposed minor amendments. This paper discusses those concerns and requests
for clarifications.
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Summary of staff recommendations
4. The staff recommend the Board finalise the minor amendments proposed in the
Exposure Draft with the following changes:
(a) the amendment to paragraph B128 of IFRS 17 should specify that changes
in the measurement of a group of insurance contracts caused by changes in
the value of underlying items (excluding additions and withdrawals) are
changes arising from the effect of the time value of money and financial
risk and changes therein (rather than changes in the fair value of underlying
items as incorrectly referred to in the Exposure Draft). The last sentence of
paragraph B134 of IFRS 17 should clarify that, applying paragraph B134 of
IFRS 17, the amount included for the insurance contracts is determined by
considering all income or expenses included in profit or loss for the
underlying items, wherever in profit or loss the income or expenses are
presented (see paragraphs 15–25 of this paper).
(b) the amendment to paragraph B96(c) of IFRS 17 should also apply to loans
to policyholders—ie for insurance contracts without direct participation
features, the contractual service margin is not adjusted for changes in
fulfilment cash flows arising from differences that relate to the time value
of money and assumptions that relate to financial risk between:
(i) any loan to a policyholder expected to become payable in the
period; and
(ii) the actual loan to the policyholder that becomes payable in the
period (see paragraphs 33–37 of this paper).
(c) the amendment to paragraphs 106(a) and B124 of IFRS 17 should specify
that an entity should present experience adjustments for premium receipts
that relate to current or past service as insurance revenue (see paragraphs
43–47 of this paper).
(d) the consequential amendment to paragraph 2.1 of IFRS 9 Financial
Instruments to clarify that insurance contracts held are not in the scope of
IFRS 9 should refer to financial guarantee contracts issued as being in the
scope of IFRS 9 (rather than to financial guarantee contracts—ie issued and
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held—as incorrectly referred to in the Exposure Draft) (see paragraphs 64–
67 of this paper).
Structure of the paper
5. The following table:
(a) lists the minor amendments in the Exposure Draft for which respondents
expressed concerns or asked for clarifications; and
(b) provides references to the paragraphs in this paper that provide, for each
proposed minor amendment:
(i) an overview of the proposals in the Exposure Draft;
(ii) an overview of the feedback; and
(iii) the staff analysis, recommendations and questions for Board members.
Proposed minor amendment Paragraphs
of this paper
1—Proposed amendment to paragraph 11 of IFRS 17 6–9
2—Proposed amendment to paragraph 28 of IFRS 17 10–14
3—Proposed amendment to paragraph B128 of IFRS 17 15–25
4—Proposed amendment to the definition of an investment component
26–32
5—Proposed amendment to paragraph B96(c) of IFRS 17 33–37
6—Proposed amendment to paragraph B123(a) of IFRS 17 38–42
7—Proposed amendment to paragraphs 106(a) and B124 of IFRS 17
43–47
8—Proposed amendment to paragraph B96(d) of IFRS 17 48–53
9—Editorial correction to paragraph B107 of IFRS 17 54–59
10—Proposed consequential amendment to IFRS 3 Business Combinations
60–63
11—Proposed consequential amendment to paragraph 2.1 of IFRS 9
64–67
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1—Proposed amendment to paragraph 11 of IFRS 17
Proposals in the Exposure Draft
6. The Exposure Draft proposed amending paragraph 11 of IFRS 17 to clarify that, if an
entity separates an investment component from a host insurance contract and the
component meets the definition of an investment contract with discretionary
participation features, the entity should account for that component applying IFRS 17.
Feedback
7. A small number of respondents asked the Board to clarify that an investment contract
with discretionary participation features may contain a distinct investment component
that should be separated and measured applying IFRS 9.
Staff analysis and recommendation
8. The staff note that:
(a) a distinct investment component that has been separated from an insurance
contract may, in itself, meet the definition of an investment contract with
discretionary participation features. Hence, the proposed amendment to
paragraph 11 of IFRS 17 aims to specify that such separated investment
components are within the scope of IFRS 17.
(b) applying paragraph 4 of IFRS 17, most of the requirements in IFRS 17 for
insurance contracts also apply to investment contracts with discretionary
participation features, provided that the entity issuing those investment
contracts also issues insurance contracts. The requirements applicable to
investment contracts with discretionary participation features include the
requirements for separating components from an insurance contract (or
from an investment contract with discretionary participation features).1
1 Applying paragraphs 10–13 of IFRS 17, an entity should assess for separation embedded derivatives,
investment components, goods and non-insurance services.
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9. Therefore, the staff:
(a) think that the Board does not need to clarify that an investment contract
with discretionary participation features may contain components that
should be separated applying the requirements in IFRS 17 (ie this is already
required); and
(b) recommend the Board finalise the proposed amendment to paragraph 11 of
IFRS 17 as proposed in the Exposure Draft.
2—Proposed amendment to paragraph 28 of IFRS 17
Proposals in the Exposure Draft
10. The Exposure Draft proposed amending paragraph 28 of IFRS 17 to require an entity
to include only contracts that meet the criteria for recognition in paragraph 25 of
IFRS 17 (rather than contracts issued by the end of the reporting period) in
recognising a group of insurance contracts in a reporting period. The proposed
amendment aims to clarify that insurance contracts are added to a group when they
meet the recognition criteria (which may or may not be when those contracts are
issued).
Feedback
11. Respondents generally supported the proposed amendment to paragraph 28 of
IFRS 17. However, some respondents disagreed with the Board’s decision not to
propose the same amendment to paragraph 22 of IFRS 17 (prohibition from including
contracts issued more than one year apart in the same group). Those respondents
continued to express concerns that:
(a) tracking insurance contracts based on the issue date requires a database
which is not currently available in most systems;
(b) if two contracts issued more than a year apart meet the recognition criteria
in IFRS 17 during the same reporting period, those contracts would need to
be included in two different groups; and
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(c) in their view, using the word ‘issued’ in paragraph 22 of IFRS 17 and the
word ‘recognised’ in paragraph 28 of IFRS 17 creates inconsistencies
within IFRS 17.
Staff analysis and recommendation
12. When developing the Exposure Draft, the Board considered whether paragraph 22 of
IFRS 17 also needed an amendment to change the reference from ‘issued’ to
‘recognised’. As explained in paragraph BC150 of the Basis for Conclusions on the
Exposure Draft, the intention of paragraph 22 of IFRS 17, in contrast to paragraph 28
of IFRS 17, is to refer to the time at which insurance contracts are issued, rather than
recognised. Therefore, the Board did not propose amending paragraph 22 of IFRS 17.
13. The Board previously noted that, usually, the date of issue of a contract and the date
of recognition will not be far apart. However, if an entity issues profitable contracts
for coverage that does not start for several years and the premiums are not due until
the coverage starts, the date of recognition will be several years after the date of issue.
The objective of prohibiting an entity from including contracts issued more than one
year apart in the same group is to provide timely recognition of profits, losses and
trends in profitability. The profitability of contracts is initially set when they are
issued, based on facts and circumstances (for example, interest rates and underwriting
practices) that exist at the date the contracts are issued. Hence, determining annual
cohorts based on the date of issue is necessary to provide useful information about
trends in profitability.
14. The staff have not identified points the Board has not considered previously and,
therefore, the staff recommend the Board finalise the amendment to paragraph 28 of
IFRS 17 as proposed in the Exposure Draft and retain, unchanged, paragraph 22 of
IFRS 17.
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3—Proposed amendment to paragraph B128 of IFRS 17
Proposals in the Exposure Draft
15. The Exposure Draft proposed amending paragraph B128 of IFRS 17 to clarify that,
for the purpose of applying IFRS 17, changes in the measurement of a group of
insurance contracts caused by changes in the value of underlying items (excluding
additions and withdrawals) should be treated as changes in investments—ie they are
changes arising from:
(a) the effect of the time value of money and changes in the time value of
money; and
(b) the effect of financial risk and changes in financial risk.
Feedback
16. Some respondents continued to express concerns that the proposed requirement to
present all changes in underlying items as insurance finance income or expenses
would distort the presentation of the different sources of profits from insurance
contracts. Although more complex, some respondents suggested that the effects of
changes in cash flows from participating in underlying items that are not financial in
nature (for example, the effect of changes in mortality expectations when insurance
contracts are part of underlying items) should be presented instead within the
insurance service result. They said this would be consistent with how the changes in
the underlying items are themselves presented applying other requirements in
IFRS 17.2
17. A small number of respondents questioned whether the requirements in
paragraph B128 of IFRS 17 apply to both insurance contracts with direct participation
features and insurance contracts without direct participation features.
18. A small number of respondents commented on the application of paragraph B134 of
IFRS 17 when an entity holds the underlying items of insurance contracts with direct
participation features and chooses to present insurance finance income or expenses
2 Appendix A of IFRS 17 and paragraph B106 of IFRS 17 state that underlying items can comprise any items,
for example a reference portfolio of assets, the net assets of the entity, or a specified subset of the net assets of
the entity.
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partially in profit and loss and partially in other comprehensive income. Applying
paragraph B134 of IFRS 17, the entity is required to include in profit or loss expenses
or income that exactly match the income or expenses included in profit or loss for the
underlying items. This results in the net of the two separately presented items being
nil. Those respondents expressed the view that to apply this requirement an entity
would be forced to recognise part of the changes in the underlying items in the
insurance service result. They said this would not be possible applying the proposed
amendment to paragraph B128 of IFRS 17.
Staff analysis and recommendation
Presentation
19. The staff note that the proposed amendment:
(a) avoids a mismatch for insurance contracts without direct participation
features that would otherwise arise when a change in underlying items held
by an entity is recognised in the statement of comprehensive income but the
effect of that change on the insurance contracts is recognised as an
adjustment to the contractual service margin;
(b) avoids potential double counting of the effect of the risk adjustment for
non-financial risk of insurance contracts that have other insurance contracts
as underlying items; and
(c) results in a faithful representation of policyholders’ participation in
underlying items as participation in an investment.
20. Consider the example of insurance contracts for which the policyholders participate in
the returns of non-participating insurance contracts (ie the underlying items are the
non-participating insurance contracts). The presentation of the result of the underlying
non-participating insurance contracts should not be affected by the fact that
policyholders in participating contracts take a share of the result. Rather, the effect of
that participation is shown as insurance finance income or expenses, representing the
effect of the entity’s sharing of its returns with the policyholders participating in the
insurance contracts.
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21. The staff think this approach is consistent with the requirements in IFRS 17 to group
contracts and to account for the outcomes of those groups distinctly from the
outcomes of other groups. It is also consistent with the requirements in IFRS 17 to
present the result of the insurance activity separately from the result of any
reinsurance activity.
22. The staff therefore think that stakeholders’ suggestion to present the effect of some
changes in underlying items of participating insurance contracts as part of the
insurance service result would result in a loss of useful information.
Application to the general model
23. The proposed amendment to paragraph B128 of IFRS 17 applies to both insurance
contracts without direct participation features (general model contracts) and insurance
contracts with direct participation features (variable fee approach contracts). The staff
acknowledge that the proposed wording ‘changes in fair value of underlying items’ in
paragraph B128(c) of the Exposure Draft raises questions in the context of the
measurement of general model contracts. For general model contracts, IFRS 17
requires an entity to measure amounts related to underlying items at the present value
of the risk adjusted probability-weighted cash flows, using current market consistent
assumptions, rather than at fair value.3 The staff think that the reference to ‘fair value’
in paragraph B128(c) is a drafting error in the Exposure Draft that the staff will
remove if the Board decides to finalise the amendment to paragraph B128 of IFRS 17.
Current period book yield
24. In relation to stakeholders’ concerns about the application of paragraph B134 of
IFRS 17 (sometimes referred to as ‘current period book yield’), the staff observe that
paragraph B134 of IFRS 17 applies to insurance contracts with direct participation
features when the entity holds the underlying items of those contracts. If applied, it
requires an entity to disaggregate the insurance finance income or expenses between
profit or loss and other comprehensive income by including in profit or loss the
amount that exactly matches the income or expense included in profit or loss for the
underlying items. The staff note that some respondents read the words of
3 For variable fee approach contracts, IFRS 17 requires an entity to measure the fulfilment cash flows based on
the fair value of the underlying items.
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paragraph B134 of IFRS 17 as reflecting the situation in which all the income or
expenses on the underlying items are financing items. This is because it states that the
result is ‘the net of the two separately presented items [investment income on
underlying items and insurance finance income or expenses] being nil’. However, the
requirement in paragraph B134 of IFRS 17 avoids an accounting mismatch in profit
or loss as a whole, and the amount included for the insurance contracts is determined
applying paragraph B134 of IFRS 17 by considering all income or expenses included
in profit or loss for the underlying items, wherever in profit or loss the income or
expenses are presented. The staff, therefore, do not think an amendment to paragraph
B134 of IFRS 17 is needed because of the proposed change to paragraph B128 of
IFRS 17, other than the following correction to the last sentence of paragraph B134 of
IFRS 17:
B134 … If an entity chooses to disaggregate insurance finance income or
expenses applying paragraph 89(b), it shall include in profit or loss expenses
or income that exactly match the income or expenses included in profit or loss
for the underlying items, resulting in the net of the two separately presented
items being nil.
Staff recommendation
25. The staff therefore recommend the Board:
(a) finalise the amendment to paragraph B128 of IFRS 17 to specify that
changes in the measurement of a group of insurance contracts caused by
changes in the value of underlying items (excluding additions and
withdrawals) are changes arising from the effect of the time value of money
and financial risk and changes therein; and
(b) reflect a correction to the last sentence of paragraph B134 of IFRS 17 by
deleting the word ‘two’ as discussed in paragraph 24 of this paper.
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4—Proposed amendment to the definition of an investment component
Proposals in the Exposure Draft
26. The Exposure Draft proposed amending the definition of an investment component in
Appendix A of IFRS 17 to clarify the Board’s intention that an investment component
is the amount an insurance contract requires the entity to repay to a policyholder in all
circumstances, regardless of whether an insured event occurs.
Feedback
27. Some respondents:
(a) suggested alternative definitions of an investment component, such as
limiting insurance contracts including an investment component to
contracts with:
(i) a right for the policyholder to withdraw a deposit;
(ii) account or unit balances or surrender values; or
(iii) cash flows for which repayment is certain and contingent only
on the passage of time.
(b) asked the Board to clarify whether policy loans meet the definition of an
investment component, also in the light of the explanation in paragraph
BC114 of the Basis for Conclusions on IFRS 17;4
(c) asked the Board to clarify that an entity is required to identify whether an
investment component exists at initial recognition of an insurance contract
and to measure any non-distinct investment component when a claim
occurs; and
(d) asked the Board to define a premium refund in IFRS 17 to make it easier to
distinguish repayments of investment components from refunds of
premiums.
4 Paragraph BC114 of the Basis for Conclusions on IFRS 17 explains that the Board considered whether to
permit an entity to separate a non-insurance component when not required to do so by IFRS 17; for example,
some investment components with interrelated cash flows, such as policy loans.
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Staff analysis and recommendation
28. The staff observe that the alternative definitions of an investment component
suggested by respondents indicate differences in perspective between the Board and
some respondents about the cash flows in an insurance contract that an entity should
exclude from both insurance revenue and insurance service expenses, rather than a
disagreement with the proposed amendment to the definition of an investment
component itself. The objective of the proposed amendment was to more clearly
articulate what the Board has previously concluded is an investment component
whereas these suggestions would introduce changes to the Board’s previous
conclusions.
29. The staff note that:
(a) IFRS 17 does not include specific requirements for accounting for a policy
loan. The term ‘policy loan’ is not defined in IFRS 17 and might be used to
refer to various forms of cash flows related to an insurance contract. It
typically refers to an amount lent by an entity to a policyholder as either an
advance payment of an investment component embedded in an insurance
contract or a loan to a policyholder. The requirements in IFRS 17 that
identify the fulfilment cash flows will determine whether amount regarded
by an entity as policy loans are cash flows within the contract boundary.
(b) paragraph BC114 of the Basis for Conclusions on IFRS 17 does not state
that ‘policy loans’ are investment components. Typically, a ‘loan’ does not
meet the definition of an investment component because it is not the
amount an insurance contract requires the entity to repay to a policyholder.
The policyholder typically borrows an amount from future benefits payable
under an insurance contract and either repays the loan subsequently or
forfeits some of the future benefit in lieu of repayment. Applying paragraph
B123(a)(iia) of the Exposure Draft that amount does not generate revenue
for the entity (see paragraphs 38–42 of this paper).
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30. The staff observe that, at its April 2019 meeting, the Transition Resource Group for
IFRS 17 (TRG) discussed determining the amount of an investment component. TRG
members observed that an entity identifies amounts of a non-distinct investment
component only when insurance revenue and incurred claims are recognised.5
31. The staff think that, although introducing a definition of a premium refund in IFRS 17
as suggested by some respondents might be helpful in some circumstances, it might
raise new questions about applying the definition in other circumstances. Therefore, it
might unduly disrupt implementation for entities.
32. As explained in paragraph BC156 of the Basis for Conclusions on the Exposure Draft,
paragraph BC34 of the Basis for Conclusions on IFRS 17 explains that an investment
component is an amount that is paid to the policyholder in all circumstances. The
purpose of the proposed amendment is only to capture that explanation in the wording
of the definition. Accordingly, the staff recommend the Board finalise the amendment
to the definition of an investment component as proposed in the Exposure Draft.
5—Proposed amendment to paragraph B96(c) of IFRS 17
Proposals in the Exposure Draft
33. The Exposure Draft proposed amending paragraph B96(c) of IFRS 17 to clarify that,
for insurance contracts without direct participation features, the contractual service
margin is not adjusted for changes in fulfilment cash flows arising from differences
that relate to the time value of money and assumptions that relate to financial risk
between:
(a) any investment component expected to become payable in the period; and
(b) the actual investment component that becomes payable in the period.
5 As noted in Agenda Paper 1 of the April 2019 TRG meeting, for an insurance contract that includes an
investment component, IFRS 17 requires an entity to: (a) separate from the insurance contract any distinct
investment component and apply IFRS 9 to such a component; and (b) consider whether the remainder of the
insurance contract requires the entity to pay any amounts to the policyholder in all circumstances (after
separating the distinct investment component, if any). Paragraph 85 of IFRS 17 requires the entity to exclude
those amounts from the insurance revenue and insurance service expenses presented in profit or loss.
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Feedback
34. A small number of respondents:
(a) expressed concerns that the proposed amendment would add operational
complexity because it would require segregation of any unexpected
investment component payments into a part which is due to a change in
financial variables (ie time value of money and financial risk) and a part
which is due to a change in non-financial variables.
(b) questioned whether an entity should present the changes discussed in
paragraph 33 of this paper as part of the insurance service result or
insurance finance income or expenses.
(c) questioned whether requirements similar to those in paragraph B96(c) of
IFRS 17 apply to loans to policyholders that do not meet the definition of
an investment component. They indicated that paragraph B96 of IFRS 17
should also specify that the contractual service margin is not adjusted for
changes in fulfilment cash flows arising from differences that relate to the
time value of money and assumptions that relate to financial risk between:
(i) any loan to a policyholder expected to become payable in the
period; and
(ii) the actual loan to the policyholder that becomes payable in the
period.
(d) asked the Board clarify the interaction between the requirements in
paragraph B96(c) of IFRS 17 and those in paragraph B123(a) of IFRS 17
for loans to policyholders (see paragraph 38–42 of this paper).
Staff analysis and recommendation
35. The recognition of changes relating to the time value of money and financial risk in
the statement of comprehensive income as insurance finance income or expenses is a
clear principle of the general model in IFRS 17. The proposed amendment to
paragraph B96(c) of IFRS 17 only clarifies that that principle applies to the changes
arising from investment components. The staff think that introducing an exception to
this principle would add further complexity to the treatment of changes in the
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measurement of a group of insurance contracts without direct participation features.
The staff therefore recommend the Board finalise the amendment to paragraph B96(c)
of IFRS 17 as proposed in the Exposure Draft.
36. The staff note that, for insurance contracts without direct participation features,
paragraph 87 of IFRS 17 states that insurance finance income or expenses comprises
the change in the carrying amount of the group of insurance contracts arising from the
effect of the time value of money and changes in the time value of money and the
effect of financial risk and changes in financial risk. Accordingly, the staff think that
the Board does not need to clarify that, applying paragraph B96(c) of IFRS 17, an
entity presents as insurance finance income or expenses changes in fulfilment cash
flows relating to the time value of money and assumptions that relate to financial risk
that arise from differences between any investment component expected to become
payable in the period and the actual investment component that becomes payable in
the period.
37. The staff agree with respondents that noted that the same requirements in paragraph
B96(c) of IFRS 17 for investment components should apply to loans to
policyholders—ie amounts in an insurance contract that the entity lends to the
policyholder and expects the policyholder to repay at a later date. Accordingly, the
staff recommend the Board amend IFRS 17 to clarify that, for insurance contracts
without direct participation features, the contractual service margin is not adjusted for
changes in fulfilment cash flows arising from differences that relate to the time value
of money and assumptions that relate to financial risk between:
(a) any loan to a policyholder expected to become payable in the period; and
(b) the actual loan to the policyholder that becomes payable in the period.
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6—Proposed amendment to paragraph B123(a) of IFRS 17
Proposals in the Exposure Draft
38. The Exposure Draft proposed amending paragraph B123(a) of IFRS 17 to clarify that
changes in the liability for remaining coverage caused by cash flows from loans to
policyholders do not give rise to insurance revenue because they do not relate to
insurance contract services provided by the entity.
Feedback
39. A small number of respondents questioned whether this proposed amendment would
apply to policy loans.
Staff analysis and recommendation
40. The staff note that, consistent with changes that relate to an investment component in
the period (see paragraph B123(a)(ii) of IFRS 17), the proposed amendment to
paragraph B123(a) of IFRS 17 aims to clarify that changes resulting from cash flows
from loans to policyholders do not give rise to insurance revenue.
41. As discussed in paragraph 29 of this paper, although the term ‘policy loan’ is not
defined in IFRS 17, it typically refers to an amount lent by an entity to a policyholder
as either an advance payment of an investment component embedded in an insurance
contract or a loan to a policyholder. Either way they will be covered by paragraph
B123(a) of IFRS 17 and therefore those amounts (and changes in them) do not give
rise to insurance revenue.
42. Therefore, the staff recommend the Board finalise the proposed amendment to
paragraph B123(a) of IFRS 17.
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7—Proposed amendment to paragraphs 106(a) and B124 of IFRS 17
Proposals in the Exposure Draft
43. The Exposure Draft proposed that an entity should present experience adjustments for
premium receipts as insurance revenue (see paragraphs 106(a)(iv) and B124(d) of the
Exposure Draft).
Feedback
44. A small number of respondents:
(a) expressed concerns that this proposed amendment seems inconsistent with
the requirement in paragraph B96(a) of IFRS 17, which states that
experience adjustments arising from premium received in the period that
relate to future service should adjust the contractual service margin; and
(b) suggested specifying that the proposed amendment refers to experience
adjustments for premium receipts that relate to current or past service.
Staff analysis and recommendation
45. The staff note that:
(a) experience adjustments arising from premium received in the period that
relate to future service adjust the contractual service margin; and
(b) experience adjustments arising from premium received in the period that
relate to current or past service are recognised immediately in the statement
of comprehensive income.
46. The staff agree with some respondents who suggested that it would be helpful
specifying that the proposed amendment refers to experience adjustments for
premium receipts that relate to current or past service.
47. Accordingly, the staff recommend the Board confirm the proposed amendment to
paragraphs 106(a) and B124 of IFRS 17 but specify that an entity should present
experience adjustments for premium receipts that relate to current or past service as
insurance revenue.
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8—Proposed amendment to paragraph B96(d) of IFRS 17
Proposals in the Exposure Draft
48. The Exposure Draft proposed amending paragraph B96(d) of IFRS 17 to clarify that,
for insurance contracts without direct participation features, if an entity disaggregates
the change in the risk adjustment for non-financial risk between the insurance service
result and insurance finance income or expenses, the entity adjusts the contractual
service margin only for the changes related to non-financial risk, measured at the
discount rates determined on initial recognition (locked-in discount rates).
Feedback
49. A small number of respondents disagreed with this proposed amendment, particularly
with the reference to locked-in discount rates. Some of those respondents would
prefer that an entity is required to measure the adjustment to the contractual service
margin discussed in paragraph 48 of this paper using current discount rates.
50. A small number of respondents provided drafting suggestions to align the wording of
paragraphs 81, 87 and B96(d) of IFRS 17 (for example, adding the effect of financial
risk and changes in financial risk to the wording of paragraph B96(d) of IFRS 17).
Staff analysis and recommendation
51. The staff note that:
(a) the requirement to use locked-in discount rates to measure changes to the
contractual service margin is a fundamental principle of the measurement of
insurance contracts without direct participation features.
(b) applying paragraph 81 of IFRS 17, an entity can choose not to disaggregate
the change in the risk adjustment for non-financial risk between the
insurance service result and insurance finance income or expenses and to
recognise the entire effect of the change as an adjustment to the contractual
service margin. This means that an entity is not required to disaggregate the
change in the risk adjustment for non-financial risk between:
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(i) a change related to non-financial risk, which adjusts the
contractual service margin and therefore is recognised as
insurance service result over time; and
(ii) the effect of the time value of money and changes in the time
value of money, which is recognised immediately in the
statement of comprehensive income as insurance finance
income or expenses.
52. Accordingly, the staff recommend the Board finalise the proposed amendment to
paragraph B96(d) of IFRS 17 to clarify that, for insurance contracts without direct
participation features, if an entity chooses to disaggregate the change in the risk
adjustment for non-financial risk between the insurance service result and insurance
finance income or expenses, the entity should adjust the contractual service margin
only for the changes related to non-financial risk, measured at the discount rates
determined on initial recognition (locked-in discount rates).
53. The staff plan to consider the drafting suggestions discussed in paragraph 50 of this
paper when drafting the final amendments to IFRS 17.
9—Editorial correction to paragraph B107 of IFRS 17
Proposals in the Exposure Draft
54. The Exposure Draft proposed amending paragraph B107 of IFRS 17 to specify that,
when assessing whether a contract meets the criteria for the scope of the variable fee
approach, an entity should assess the variability of the amounts to be paid to the
policyholder over the duration of the insurance contract (rather than over the duration
of the group of insurance contracts as incorrectly specified by paragraph B107 of
IFRS 17 as originally issued). The Board considered this to be an editorial correction.
Agenda ref 2D
Amendments to IFRS 17 │ Minor amendments
Page 20 of 23
Feedback
55. Some respondents view the proposed amendment to paragraph B107 of IFRS 17 as a
major change to the requirements in IFRS 17 that would disrupt implementation,
rather than as an editorial correction.
56. Some of those respondents had assumed that an entity is required to apply the criteria
for the scope of the variable fee approach in paragraph B101 of IFRS 17 at the level
of a group of insurance contracts for consistency with paragraph 24 of IFRS 17. That
paragraph states that an entity should apply the recognition and measurement
requirements of IFRS 17 to groups of insurance contracts. Those respondents
expressed the view that it would be burdensome for entities to allocate all cash flows
to individual insurance contracts in order to perform the eligibility test for the variable
fee approach.
Staff analysis and recommendation
57. The staff note that IFRS 17 includes different requirements for insurance contracts
with direct participation features (contracts to which the variable fee approach
applies) and for insurance contracts without direct participation features (contracts to
which the general model applies). Accordingly, an entity is required to:
(a) distinguish between insurance contracts with direct participation features
and insurance contracts without direct participation features; and
(b) apply the variable fee approach measurement requirements to groups of
insurance contracts with direct participation features and the general model
measurement requirements to groups of insurance contracts without direct
participation features—ie a group of insurance contracts cannot at inception
include a mix of insurance contracts with direct participation features and
insurance contracts without direct participation features.
Agenda ref 2D
Amendments to IFRS 17 │ Minor amendments
Page 21 of 23
58. Insurance contracts with direct participation features are defined in paragraph B101 of
IFRS 17. This paragraph requires an entity to assess whether it expects to pay a
substantial share of fair value returns to the policyholder, and whether a substantial
proportion of changes in amounts paid to the policyholder are expected to vary with
changes in the fair value of the underlying items. To apply paragraph B101 of
IFRS 17:
(a) paragraph B102 of IFRS 17 specifies that an entity assesses whether the
conditions in paragraph B101 of IFRS 17 are met using its expectations at
inception of the contract and does not reassess the conditions afterwards,
unless the contract is modified;
(b) paragraph B103 of IFRS 17 specifies that if a contract affects the cash
flows to policyholders of other contracts an entity assesses whether the
conditions in paragraph B101 of IFRS 17 are met by considering also those
cash flows; and
(c) paragraph B107 of IFRS 17 specifies how to assess the variability of the
amounts mentioned in paragraph B101 of IFRS 17.
59. In the light of the analysis in paragraphs 57–58 of this paper, the staff think that it is
clear that an entity is required to apply the criteria for the scope of the variable fee
approach at the level of an individual contract applying IFRS 17. Accordingly, the
staff recommend the Board finalise the editorial correction to paragraph B107 of
IFRS 17 to ensure consistency within IFRS 17.
Agenda ref 2D
Amendments to IFRS 17 │ Minor amendments
Page 22 of 23
10—Proposed consequential amendment to IFRS 3
Proposals in the Exposure Draft
60. The Exposure Draft proposed amending IFRS 3 to clarify that an entity can continue
to classify insurance contracts acquired through a business combination that occurred
before the date of initial application of IFRS 17 based on the contractual terms and
other factors at the inception of the contract, rather than at the acquisition date.
Feedback
61. A small number of respondents commented to support the clarification. However,
they continued to suggest the Board amend IFRS 17 to extend this exception to the
principle in IFRS 3 (ie an acquirer classifies assets acquired and liabilities assumed
based on the terms and conditions as they exist at the acquisition date) to contracts
acquired through a business combination that occurred after the date of initial
application of IFRS 17.
Staff analysis and recommendation
62. At its November 2019 meeting, the Board tentatively decided that it would not
consider further the feedback on the classification of contracts acquired through a
business combination because:
(a) when developing the Exposure Draft the Board considered the concerns and
suggestions from respondents regarding the requirement in paragraph 15 of
IFRS 3 that an entity should classify assets acquired and liabilities assumed
based on the terms and conditions as they exist at the acquisition date; and
(b) the staff have not identified points the Board has not considered previously.
63. Accordingly, the staff recommend the Board finalise the proposed consequential
amendment to IFRS 3 to clarify that an entity can continue to classify insurance
contracts acquired through a business combination that occurred before the date of
initial application of IFRS 17 (and only those business combinations) based on the
contractual terms and other factors at the inception of the contract, rather than at the
acquisition date.
Agenda ref 2D
Amendments to IFRS 17 │ Minor amendments
Page 23 of 23
11—Proposed consequential amendment to paragraph 2.1 of IFRS 9
Proposals in the Exposure Draft
64. The Exposure Draft proposed amending paragraph 2.1 IFRS 9 to clarify that,
consistent with the scope of that Standard before IFRS 17 was issued, insurance
contracts held are not in the scope of IFRS 9.
Feedback
65. Some respondents noted a mistake in the drafting of the proposed consequential
amendment to paragraph 2.1 of IFRS 9 that would result in the unintended
consequence of requiring entities to account for financial guarantee contracts held
applying IFRS 9.
Staff analysis and recommendation
66. The staff acknowledge the Exposure Draft included a drafting error that inadvertently
resulted in proposing that an entity is required to apply IFRS 9 to all financial
guarantee contracts (whether issued or held).
67. The staff recommend the Board confirm the proposed consequential amendment to
paragraph 2.1 of IFRS 9 to clarify that insurance contracts held are not in the scope of
IFRS 9. To achieve that objective the consequential amendment should refer to
financial guarantee contracts issued as being in the scope of IFRS 9 (rather than to
financial guarantee contracts—ie issued and held—as incorrectly specified in the
Exposure Draft). This would reinstate the scope of IFRS 9 as it was prior to the issue
of IFRS 17, which was the intention of the amendment.
Question for Board members
Do you agree with the staff recommendations for finalising the minor
amendments proposed in the Exposure Draft with the changes discussed in
this paper?